AN OVERVIEW OF GOODS AND SERVICES TAX (GST) IN INDIA

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© Associated Asia Research Foundation (AARF)

A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 37

AN OVERVIEW OF GOODS AND SERVICES TAX (GST) IN INDIA

Shashi Kapoor

Assistant Professor

University Business School, Panjab University Regional Centre, Ludhiana

ABSTRACT

GST is most crucial indirect tax reform in India. The idea of implementing GST, which was

floated in year 2000 for the first time, took 17 years for its implementation. Cascading effect of

taxes, variations in tax rates and tax structures among different states and non-availability of

input tax credits in some cases were some of the major limitations of the different indirect taxes

applicable at that time. Different taxes like excise duty, state sales tax or VAT, central sales tax,

service tax, entry tax and luxury tax etc. have been replaced by one single, comprehensive and

uniform tax called Goods and Services Tax (GST), which considers no distinction between goods

and services for the purpose of taxability. This dual system of GST allows both central and state

governments to charge tax on goods and services. It aims primarily to eliminate the cascading

effect of tax prevailing in the previous tax regime and make the tax system more simple, efficient

and transparent

Key Words: Tax, VAT, GST, GST Council, Tax Reform

Introduction:

Implementation of Goods and Services Tax in India is a major indirect tax reform since

independence. It is a Value Added Tax (VAT) levied on both goods as well as services

implemented with the objectives of removing the cascading effects of tax in the present tax

International Research Journal of Management and Commerce

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 38 system, broadening the tax base, removing the interstate variations of taxes and to simplifying

the tax structure in our country. That’s why it is called a comprehensive, consumption based,

multi-stage tax based on the principle of value addition. It has replaced the complicated indirect

tax system imposed by Union and States governments separately. It has unified all the indirect

taxes under one umbrella. It is not another tax imposed by government but is replacement of

many indirect taxes imposed by central and state governments.

In India, Idea of GST was first initiated in year 2000 by then Prime Minister Sh. Atal Bihari

Vajpayee. In order to design GST Model, a committee was setup by then NDA Govt. under

chairmanship of Mr. Asim Das Gupta. But the first announcement of target date for

implementation was made by then Finance Minister Mr. P. Chidambaram during his budget

speech on 28th February, 2006, where he announced 1st April, 2010 as the target date for implementing GST in country and an empowered committee of state finance ministers was

formed to decide the roadmap for this biggest tax reform. Idea which germinated in year 2000,

due to procedural and political hiccups, took 17 years for implementation. Finally nation got its

GST implemented on 1st July, 2017. More than 160 countries have implemented Goods and Services Tax till date. France is known to be the first to introduce GST in the year 1954 followed

by many other countries like UK, Canada, Australia, New Zealand, Pakistan, Bangladesh and

Malaysia etc. Most of the countries in the world follow single GST system except Brazil and

Canada. The Indian GST is also Dual GST system where GST is imposed by Union and State

Governments separately in the form of State Goods and Services Tax (SGST) and Central Goods

and Services Tax (CGST).

Review of Literature:

Devi (2017) studied the Indian indirect tax structure and proposed GST. She highlighted that

implementing GST will boost growth of Indian economy by increasing exports, creating ample

employment opportunities. She stressed that it will eliminate cascading effect of tax and will lead

to reduction in the prices of goods and services which in turn will result to more consumption

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 39 Ahmad & Poddar (2009) supported the rational of implementing GST by highlighting limitations

of present indirect tax system. They found the present indirect system quite complex and

suffering from cascading effect of taxation. Present system of VAT is not efficient enough to

provide full input tax credit to the dealers and there are different types of taxation system

prevailing for products and services. Study concluded that having a uniform taxation system for

both goods and services across the nation will result into fiscal autonomy and harmonization.

Kumar (2017) studied the attitude of taxpayers and auditors regarding the implementation of

GST. He conducted a survey to assess the opinions of the respondents regarding expected

benefits of Goods and Services Tax. Majority of respondents were of the opinion that GST will

increase the tax base leading to increase in govt. revenue at the same time will benefit the

customer also by reducing the prices. The system will be more transparent and simple. Study

found a significant level of satisfaction amongst respondents regarding tax rates.

Gupta & Komal (2017) conducted a comparative analysis of Indian GST with other countries in

regard their respective models, structures, rates of taxes etc. Study found the rates of Indian GST

higher than the average rates of other countries. They concluded that due to multiplicity of the

taxes and other administrative complexities, compliance cost of current system of taxation has

increased up to great extent therefore a single destination based taxation system is required to

eliminate the limitations of current taxation system.

Shehrawat & Dhanda (2015) in their study highlighted the time line for implementation of GST

in India. The study pointed out various features of proposed GST and also highlighted the key

functions of proposed GST Council. They concluded that proposed system of GST will reap the

benefits of single and uniform tax structure and will increase the tax base also.

Objectives of the Study:

Following are the objectives of study:

1. To analyze the previous indirect tax reforms and highlight the major limitations of

Pre-GST tax regime leading to implementation of Pre-GST in India.

2. To study the Goods and Services Tax implemented in India and highlight its major

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Research Methodology:

The study adopts a descriptive research design and is based on the secondary data collected from

various journals, magazine, newspapers and websites.

Administration of GST:

For the purpose of administering GST in India, a new body was set up called GST Council. In

order to create this council, Govt. of India brought a constitutional amendment bill namely The

Constitution (101st Amendment) Act, 2016. This council consists of:

- Union Minister of Finance as its Chairman

- Union Minister of State in charge of Finance or Revenue as its member and

- Minister in charge of Finance or Taxation of each State Government as its member

GST Council is the body which makes recommendations to Union and State Government

regarding various issues related to implementation and administration of GST like:

1. Different taxes to be substituted by GST.

2. Taxability or exemption of various goods and services under GST.

3. Rates of Taxes to be levied under GST.

4. Threshold limit of sales beyond which dealers’ registration will be mandatory.

5. Apportionment of revenue, amongst Union and State Government, collected under GST

on Interstate taxable supplies.

6. Any future date from which GST shall be levied on petroleum products, aviation turbine

fuel (ATF) and alcoholic beverages for human consumption.

7. GST council acts as a dispute settlement authority also.

Modern tax administration in any country is very much dependent on information technology

(IT) infrastructure. Success of GST depends on establishing an effective IT system and

integrating IT systems already prevailing across states and central governments. Such integration

will provide smooth transfers of input tax credits across states and acts as tax clearing house for

inter-state transactions. Simplification of the procedures for submissions of returns would induce

voluntary compliance and therefore it is expected that minimum burden on tax payers in terms of

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 41 To achieve this objective, the GST Network (GSTN) has already been formed by government by

forming a non-governmental private limited company u/s 25 (not for profit companies). It was

incorporated in 2013 with authorized capital of Rs. 10 crores. 24.5% equity in this company is

owned by Central government whereas another 24.5% of equity is owned by all states

governments. Balance 51% share of equity is owned by non-governmental financial institutions.

This company has been incorporated primarily to provide IT infrastructure and services to

central and state governments, taxpayers and other stakeholders for implementation of the GST.

Previous Tax Reforms

In the past few decades, indirect taxation system in India has witnessed many reforms.

Introduction of Modified Value Added Tax (MODVAT) in 1986, implementation of Service Tax

in 1994, Central Value Added Tax (CENVAT) in 2001 and replacement of Sales Tax by VAT by

different state governments in 2005-06, are the few to talk about. A manufacturing level Value

Added Tax System called Modified Value Added Tax (MODVAT) was introduced in the year

1986. This system had limited coverage and provision for input tax credit initially and later the

scheme was expanded and credit for duty paid on capital goods was also brought under this

scheme. But this system was suffering from many limitations as it was inspection intensive and

required a lot of physical verification of goods lead to complexity of the system. Further the

input tax credit was allowed on one to one matching of inputs and output resulting into many

issues related to tax administration and increased compliance cost.

In order to overcome the limitations prevailing in MODVAT, a new system called Central Value

Added Tax (CENVAT) was introduced in 2001 adopting the recommendations of tax reform

committee. It widened the tax base and introduced the provision of allowing input tax credit in

the absence of physical verification of goods on removal. It further allowed the input tax credit

against input as well as capital goods which was missing in the MODVAT.

Meanwhile service tax was also introduced in the year 1994 on three services only which

gradually expanded its ambit by increasing the number of taxable services. Later in the year

2004, input tax credit scheme of CENVAT and Service tax were merged allowing the tax payers

to avail cross input tax credit. In the Union Budget 2012-13, the concept of a “negative list” for

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 42 Introduction of negative list based taxation of services resulted in transition from selective list

based taxation of services to comprehensive approach where all services, except those in the

negative list, were brought under the service tax. However, a number of services which were in

the negative list, were either taxed by the State Governments (e.g., service of transportation of

passengers, services by way of transportation of goods, betting, gambling or lottery, access to a

road or a bridge on payment of toll charges, Trading of Goods) or by the Central government by

other taxes (e.g., processes amounting to manufacture or production of goods).

Prior to introduction of VAT principle, indirect taxes were suffering from problem of cascading

effect. There was tax competition and disharmony in tax rates, exempted items and different tax

schedules of different states because of which there were problems faced by tax payers while

claiming input tax credits for inter-state purchases.

Introduction of CENVAT could be termed as the first coordinated tax reform initiative in India

since independence as it achieved many milestones. Some of these can be discussed as follows:

1. An Empowered Committee of State Finance Ministers was formed to build a bridge

across States as well as Central Government. The Committee played a crucial role to

build consensus among States and Central Government to roll out VAT.

2. The relatively harmonized tax structure, rates, tax schedules and tax base were achieved

under VAT which resulted in cleaner tax system for State tax administration and

harmonization of rules and regulation created a favorable environment for economic

activities.

3. Introduction of pre-announced audit instead of surprise inspection of premises resulted in

greater reliance on voluntary compliance by taxpayers.

4. By allowing input tax credit against inputs as well capital goods, the system facilitated

State tax administrations to get familiar with processes of refunds which prepared the

base for further tax reforms like GST.

5. Adoption of information technology-intensive infrastructure empowered State tax

administrations to sharpen their skills in more crucial parts of tax administration like

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 43 6. By allowing input tax credits, the system unlocked substantial working capital previously

locked in as unpaid credits, and provided incentives to taxpayers for voluntary

compliance.

Limitations of Pre-GST Tax System:

a) In regard to Taxation of Goods

In the previous indirect tax regime, four major taxes were levied on goods manufactured in

country. First was the CENVAT, which was a value added tax imposed and collected by central

government and incidence of tax was manufacturing of goods. It was uniform across different

states and allowed the input tax credit against Central Excise duty, Service Tax (2004 onwards)

and countervailing duty. And other taxes were state sales tax or VAT and Entry Tax (in lieu of

Octroi), which were imposed, collected and retained by state governments. Fourth tax was

central sales tax, which was levied by central government on inter-state trades or sales but was

collected and retained by exporting states only.

The rates of State taxes and rates for allowing input tax credits varied across States. For

example, the standard VAT rate varied from 12.5% to 14.5 % for the majority of States. For

goods which are under State VAT, input tax credits against in-State purchases were allowed. For

the majority of States, Entry Tax (in lieu of Octroi) was commodity specific and some States did

not allow an input tax credit against Entry Tax (e.g., Assam, Karnataka, Odisha). Entry tax rates

varied across States and commodity. Therefore previous system resulted in substantial

transaction costs for businesses, as they had to comply with different State tax rules and

regulations with different tax rates for same commodity, and it discouraged voluntary

compliance which leads to revenue leakage.

This system of taxation could be best described as an origin-based tax system where the

manufacturing (origin or exporting) State collected CST on goods being sold inter-State. Since it

was a tax collected by the origin state, the destination (importing) State was not used to allow

input tax credit against CST. Therefore, CST remains a stranded cost for inter-State dealers and

manufacturers using goods procured from other States. If the goods were used to sold from the

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 44 equivalent to State VAT whereas the destination State did not get any tax on the transaction.

However, if the incoming goods were imported for trading, the import attracted full State VAT

in addition to Entry Tax depending on the type of the goods and State of operation. In States

where entry tax was used to be collected on behalf of local governments and the revenue was

passed on to them, Entry Tax remains a stranded cost for these States as no input tax credit

against Entry Tax is allowed. A few States provided input tax credits against Entry Tax provided

the goods are meant for further value addition or trade in the State concerned.

The non-allowance of input tax credits breaks the chain, leading to cascading effect which is not

conducive for businesses as it causes substantial locking up of working capital as unpaid credits.

The system also did not provide enough incentives to businesses to take registration.

Non-inclusion of a large section of businesses under the tax net is not conducive for the economy as

well as taxation system. These features of the previous indirect taxation system encouraged a

large part of economic activities to evade taxes and generate unaccounted income.

b) In regard to Taxation of Services

Similar kinds of problems were prevailing in the service tax also. Service tax was a tax imposed

and collected by Central Government on all services except mentioned in negative list. Since

these services were not zero-rated therefore these services were not able to claim refund of

CENVAT paid on purchase of goods and services as input and thus remains a stranded cost.

Therefore the previous tax regime was suffering from following limitations:

1. There was no uniformity of tax rates across states.

2. There was cascading effect of taxes due to tax on tax.

3. No credit for excise duty and service tax paid as input tax was available to trader while

paying state level sales tax or VAT and vice versa.

4. Further no credit for taxes paid in one state was available in other states.

5. Imposition of multiple taxes with different tax base in different states made the tax

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 45 All such issues warrant the replacement of previous tax regime by an efficient, simple and

rational GST structure. It is expected that under GST regime, the tax structure across States will

be harmonized as multiple taxes have been subsumed under GST and further there will be no

distinction considered between goods and services, therefore all above said limitations will

automatically be eliminated and tax payers will be in a position to take full credit for input tax

paid irrespective of goods or service.

Salient Features of Indian GST:

1. It is applicable to both goods and services.

2. Incidence of tax in GST is the supply of taxable of goods and services as against the

manufacture of goods, removal of goods or sale of goods in the previous tax regime.

3. GST is chargeable on all goods and services whereas some products like alcohol for

human consumption, electricity, real estate are kept outside the purview of GST. Further

few goods like petroleum products, natural gases, aviation turbine fuel (ATF) are also

excluded from the ambit of GST, but will be included under GST on a future date to be

recommended by GST Council. Tobacco is also covered under GST in addition to power

of central government to charge excise duty on the same.

4. In contrast to previous tax regime, there is no distinction in raw materials and capital

goods for availing credit of input tax.

5. No difference in goods and services for the purpose of chargeability of tax which

removes the classification dispute.

6. It is a dual system of taxation wherein Central and State govt., both levy tax on the same

base of tax simultaneously. GST imposed by Center is called Central Goods and Services

Tax (CGST) and that to be levied by State is called State Goods and Services Tax

(SGST). Both the taxes are chargeable on common base i.e. supply of taxable goods and

services.

7. In addition to above an Integrated Goods and Services Tax (IGST) is also levied by

Central Government on the Inter-state sales. IGST is later apportioned between Central

and State Govt. as per recommendations of GST Council. The following table clarifies

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Sr. Type of GST

Levied on Collected by

1 SGST Intra-state sales State Government

2 CGST Intra-state sales Central Government

3 IGST Inter-state sales Collected by Central Government and then

shared between Central Government and State Government depending upon principle of destination of Goods

8. It is a destination based consumption tax as against the origin based taxation in the

previous tax regime.

9. Import of goods is also treated as inter-state supplies and is subject to IGST in addition to

applicable custom duties.

10.Exports are considered as zero-rated supplies.

11.GST is levied on the rates mutually decided by Central and State Governments and

notified by GST Council. As of now four rate slabs of 5%, 12%, 16% and 28% are

applicable. In addition, a cess would be imposed on some goods categorized as demerit

goods.

12.State governments will be compensated by Central government for the first 5 years on

account of any loss of revenue arising because of GST. Quantum of this compensation

will be decided GST council.

13.A threshold limit of Rs. 20 Lakh is applicable for both SGST and CGST collectively. A

dealer having an annual turnover of taxable goods and services below this limit is not

bound to register for the GST.

14.There is another optional scheme called “Composition Scheme” available for small

taxpayer having annual turnover of taxable goods and services upto Rs. 50 lakhs. Under

this scheme dealer is liable to pay tax as per a fixed percentage on his annual turnover in

his state without availing the benefit of Input tax credit.

15.Tax payers/ dealers registered under normal scheme can avail the full credit of input GST

paid in purchase of goods and services.

16.Credit for input CGST paid on purchase can be taken from Output CGST collected by

dealer and similarly credit for input SGST paid on purchase can be taken from output

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 47 SGST collected on sales. In other words two streams of input tax credit cannot be cross

utilized except in case of IGST.

17.The whole mechanism of GST is backed by IT support system called Goods and Services

Tax Network (GSTN).

18.Following are the major act enacted by governments to implement GST:

Major Acts Passed by Central & State Governments

1. 101st Constitutional Amendment Ac, 2016

2. The Central Goods and Services Tax Act, 2017

3. The Integrated Goods and Services Tax Act, 2017 4. The Union Territory Goods and Services Tax Act,

2017

5. Different State Goods and Services Tax Acts have been passed by each state government separately.

19.GST has replaced the following taxes earlier levied and collected by Central and State

Governments:

Central Taxes substituted by GST State Taxes substituted by GST

1. Central Excise Duty

2. Duties of Excise (Medicinal and toilet Preparations)

3. Additional Duties of Excise (Goods of Special Importance)

4. Additional Duties of Excise (Textiles and Textiles Products)

5. Additional Duties of Customs 6. Special Additional duty of Customs 7. Service Tax

1. State VAT

2. Central Sales Tax (CST) 3. Purchase Tax

4. Luxury Tax 5. Entry Tax

6. Entertainment Tax (Except those levied by local bodies)

7. Taxes on Advertisements

8. Taxes on lotteries, betting and gambling

Advantages:

Implementation of GST has resulted into removal of cascading effect of tax completely as it is a

tax based on VAT principle. It allows input tax credit across goods and services at every stage of

supply. It has harmonized the tax laws, procedures and rates of taxes. Uniform rates of taxes

across nation will reduce the incentive for tax evasion and average tax burden is likely to come

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A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories. Page | 48 1. Removal of cascading effect of taxes which will result into reduction in prices and will

make the Indian products and services more competitive in global market.

2. Simpler tax regime with fewer exemptions and broader tax base.

3. It has created a single, unified Indian market to make the economy stronger.

4. Reduction in multiplicity of taxes leading to simplification and uniformity.

5. Reduction in compliance cost as no multiple records keeping will be required for variety

of taxes.

6. Simplified and automated procedures for various processes such as registration, returns,

refunds and tax payments etc.

7. Less public interface as al interaction is through common portal called GSTN.

Conclusion:

By implementing GST, India has entered into a tax regime that is almost similar to the rest of

world. It is simple and harmonized tax structure that is neutral to business processes across

country. It is known to be an efficient tax system because it will reduce the cost of collection and

eliminate the economic distortions. It will lead to higher output, more employment opportunities

and flourish Indian GDP and give India a platform to increase its national income and revenues.

But the positive impacts referred above are dependent on a neutral and rational design of the

GST, balancing the conflicting interests of various stakeholders, full political support for this

fundamental tax reform.

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